Rising Demand for Sand

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In the age of the shale boom, oil and sand go hand in hand. If crude goes up in the next three years, the price of sand is likely to follow.

U.S. drillers pump about 80 billion pounds of sand into their wells every year to help open the rocks that they milk for oil and gas. It has been a down year for the industry, but sand could be the biggest winner if the rebound many are expecting comes to pass. Investors can wager on a comeback for sand through producers Fairmount Santrol Holdings and U.S. Silica Holdings, both up this year but far from their historical peaks.

Some investors have been betting that oil and gas prices will rise steadily or even surge in coming years, after energy outfits slashed hundreds of billions of dollars from their budgets. Oil and gas companies around the world are still hurting from a petroleum glut that sent prices to a decade low in the winter; if they won’t or can’t spend to keep pumping, prices eventually should shoot up in a world where demand is growing to new records every year.

Sand would benefit because U.S. drillers are among the most likely to fill the gap if oil and gas are in short supply. They have been adding rigs in the oilfields, after crude briefly hit $50 a barrel. In a rebound, shale wells could come on quickly, compared with billion-dollar megaprojects.

Sand is central to the sideways-drilling and hydraulic-fracturing process that has made U.S. oil and gas wells among the cheapest in the world. American drillers have figured out that if they pump millions of pounds of sand down every well, all those grains get jammed into tiny cracks that their drills make in shale and other rocks. The sand keeps the cracks ajar, so the oil and gas flow out of the rock and into the well.

THE DOWNTURN in oil and gas prices—the rig count has fallen nearly 80% in two years, to historic lows—has put pressure on sand producers. A surplus has built up, and big growth projections have failed to materialize. But it has also brought sand producers’ shares down to more attractive levels for investors, and led to innovations that renew hopes for growing sand demand, analysts say.

The pressure to cut costs has drillers showing a greater preference for sand over the alternatives once pitched as more effective—ceramic particles and resin-coated sand. It is much cheaper, and has proved easier for drillers to stuff into the far reaches of the longer wells they’re drilling, says George O’Leary, a research analyst at the energy investment bank Tudor, Pickering, Holt. In 2015, sand captured 97% of this market, up from 89% in 2012, according to Citigroup.

Both banks expect the number of new U.S. wells and the amount of sand each of those wells uses to increase dramatically in coming years. They expect the number of horizontal wells in the U.S. to double between this year and 2018. With wells being horizontally fractured, or fracked, more than ever, the amount of sand going into each one is likely to rise to eight million or 11 million pounds by 2018 from five million two years ago.

That would boost sand consumption from about 60 billion pounds this year—a four- or five-year low—to 139 billion-200 billion pounds by 2018, according to Citi and Tudor, Pickering estimates. Prices would have to rise about 30%, from under $30 a ton now, to meet the demand, Citi says. White sand could hit $65 a ton from prices now under $20, Tudor, Pickering contends.